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The Curious Bid For Atmel

Posted: Oct 07, 2008 09:35 AM by Stephen Simpson

Tickers in this Article: SNDK, IRF, VSH, TM, GM, MCHP, ONNN, ATML

Amid all of the turmoil in the markets last week, an odd deal proposal surfaced in the semiconductor space. Microchip Technology (Nasdaq:MCHP) and ON Semiconductor (Nasdaq:ONNN) publicly announced their desire to acquire rival Atmel (Nasdaq:ATML) for $5 per share in cash.

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The Deal
It is worth noting that it was not Atmel that announced the deal; the company's board has not approved the deal and does not seem terribly enthusiastic about the deal. According to Microchip's letter to the board of directors, Atmel's board was apparently "unwilling to consider a transaction at this time under any circumstances" at an earlier meeting in September. So, the would-be acquirers are resorting to a time-tested (and legitimate) approach - make the deal public and let Atmel's shareholders either overrule the board by expressing their support for the deal, or close ranks around the board and rebuff the buyers. (To learn more, read Analyzing An Acquisition Announcement.)

While the rationale of the deal makes some sense to me, the structure of the deal is a little unusual. Technically, Microchip would acquire Atmel and then sell part of the business (the RF, auto, and non-volatile memory parts) to ON Semiconductor for about $1 billion in cash. Microchip would keep Atmel's microcontroller business and sell the ASIC (application-specific integrated circuit) business, and it would seem that Microchip has already had at least some hypothetical conversations with a potential acquirer.

What Microchip Tech Gets
I understand why Microchip would do this deal. It is an opportunity to grow the microcontroller business at a very attractive valuation, and there is the possibility that the company could take the more than $500 million in revenue Atmel produces here and generate better margins. However, I wonder how the market will interpret this deal. Is it a savvy move to add cheap assets, or is it a tacit admission that organic growth opportunities have started to evaporate?

What ON Semiconductor Gets
The rationale for ON Semiconductor is not quite as solid. The same margin argument could be made, but it is a little more difficult to get excited about growing the auto business when companies like General Motors (NYSE:GM) are struggling and even mighty Toyota (NYSE:TM) is offering exceptional financing terms. What's more, ON Semiconductor will have to add more debt to its balance sheet to do the deal and that's a scary idea in today's credit markets. On top of that, the valuation of the Atmel deal is such that some investors might question why the company chooses to borrow money to buy part of Atmel when the company could buy back its own shares at a similar valuation.

At the very least, I am hoping that Atmel holds out for a better price. True, Atmel is having a rough go of it now, as margins are not strong and restructuring efforts are taking time to work out. But the company's microcontroller business is a valuable asset and companies seldom get good value when they sell out in the early days of a turnaround effort. I also have to acknowledge a personal interest here; Atmel was the second stock I ever owned and I would prefer to see the company put up a little bit of a fight before it goes away. (For related reading, see Cashing In On Corporate Restructuring.)

Bottom Line
Maybe there's something in the air, but now seems to be the season for less-than-friendly semiconductor deals. Vishay International (NYSE:VSH) is going hard after International Rectifier (NYSE:IRF), and Samsung has made a run for SanDisk (Nasdaq:SNDK). That aforementioned "something" may be a mix of opportunity and necessity; organic growth may be harder to come by as we enter a recession and acquirers may be assuming that both target companies and their employees are less likely to resist their overtures in this environment.

By Stephen Simpson

Stephen Simpson, CFA, has worked as an equity analyst for both sell-side and buy-side investment companies, and presently works as a sell-side equity research analyst. He has worked as a consultant for the healthcare sector, and has written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson is the editor of Kratisto Investing, a website devoted to financial analysis and personal commentary.

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